The UK’s high quality, high performance leather and leather goods firm Pittards has more than 100 years experience working with Ethiopia. CEO Reg Hankey explains what makes it such an ideal place to do business, particularly in adding value to its raw assets, and why it’s “absolutely going in the right direction”.
What makes Africa so attractive and why did you decide to invest in Ethiopia?
If you go back a decade or two, the whole of the investment excitement was about Asia, and in particular about China, and quite rightly so. When we decided to move some of our production offshore, which was around 2004-2005, we certainly started looking towards China, but we collectively decided that that phase had passed. As a manufacturer for the future, we took a view that we should be closer to where the commodities are, where the raw materials are, rather than flying the commodities all over the world.
The Prime Minister of Ethiopia at that time, Meles Zenawi, had a very clear vision of the road out of poverty. He wanted added-value development for his country and for it to stand on its own two feet. Our company had been trading with Ethiopia for over 100 years and we believed that instead of following the trend and dashing to China, it would be better to back ourselves into our supply chain and come to Ethiopia. Our corporate strategy was therefore very goal-aligned with the development strategy of Ethiopia as a growing nation. We were in a position to take our business to the next stage of development within Ethiopia.
Beyond the strategic opportunity, there were also the practical aspects. For example, there are generally no import duties for products made in Ethiopia that are exported to America or Europe. This is quite significant when companies are looking for improving margins in the very large consumer markets like the USA and Europe.
Further to this there was the language to consider. The vast majority of school children, graduates, and citizens in Ethiopia speak excellent English as it is taught as the second language. Comparing Ethiopia with the great China, which is a fantastic powerhouse for the world, in-depth communications in English seem to be easier, as in China it can be quite difficult. The smaller time difference between Europe and Ethiopia also makes communication much simpler compared with Asia.
Looking strategically at the workforce, there is a growing population in Ethiopia that is now over 95 million, and more than 50% are under the age of 18. There are a growing number of people who are seeking employment at all levels, including a very high proportion of graduate-level people. Some years ago the government started to develop programs to provide a high level of education to the population of Ethiopia. That means we can hire well-educated people into our management teams. The combination of all of these factors make Africa a happening place and in particular, Ethiopia.
Was it all plain sailing from the beginning?
When we first arrived there were some challenges operating in Ethiopia, but we were very aware of the government’s clear intention to remove obstacles and improve the operating environment for foreign investors. For example, it is very detrimental to your business model if you are unable to get chemicals in or finished products out of your factory efficiently, or indeed if you can't rely on a consistent, regular electricity supply. This can be a problem in a world where the gold standard of manufacturing performance has been established by China. We must deliver good quality on time and there is no room for failure in a competitive world. When the infrastructure was weaker 10 years back, it was a challenge for us. But we were convinced right from the top, from the Prime Minister, that the government was absolutely determined to create the infrastructure change that would enable us to do our jobs better. Many people didn't believe that was possible, taking into account the size of Ethiopia and the size of the challenge.
Nevertheless, year after year the government has directed a high proportion of its gross domestic product to infrastructure development. We now see massive electricity production; probably the cheapest electricity in the world is in Ethiopia. There are some issues with power distribution, but that will get resolved. There is incredible development in roads and we are very excited about the new railway that will take freight to and from Djibouti. The train line will take two days out of our supply chain in terms of shipping products out, as well as shipping chemicals in.
All in all, it's absolutely going in the right direction. We are continually impressed by the rate of growth.
How do you assess the country’s vision to become light manufacturing industry centre in Africa by 2025?
I first visited Ethiopia in March 1991, just at the end of the Derg regime. It was quite a challenging time; it was difficult for food, for fuel, and people were in numerous difficulties. I have seen a steady improvement year on year in all aspects since then. Certainly the last 10 years, and in particular the last five years, the rate of that development has just accelerated.
Ethiopia is now a very credible country for development of business and industry. That can be evidenced by the number of customers who are now coming to the country, doing their risk assessments, sourcing, and actually placing orders here. The evidence is its happening; people are buying; trade is growing. That's happening because there has been tremendous development within the country. Through my own eyes, having visited for 25 years, I can see it. I can feel it.
How would you assess the government’s efforts to make it more business friendly?
I think that the philosophy is absolutely right. If you take any country as it develops, it tends to begin with what you would call the basic industries. Leather production is very close to the agricultural economy side of any country. Leather is a by-product of the meat industry. Where there is an agriculture-based economy and a meat industry, you will have leather. If the government said for example, we want to make televisions next week from a standing start, that would be very difficult.
If you want to move an agriculturally based economy towards an industrially led economy, the best place to start is with the products and the raw materials that you already have. Any industries that are the next phase along from agriculture are the easiest place to start. You would naturally steer towards textiles. You would then look towards the shoe industry and garment production. That sort of development was true for China in the early days as it was true for Korea and most other Asian countries. Ethiopia is following a very similar model, and our company is well placed to develop in this sector.
Pittards disclosed it intends to increase its production capacity by threefold in the coming years. How is this project advancing and on what strategy will it be based?
We basically have two trading divisions operating in Ethiopia now. We operate one division that makes and exports leather as a finished product to different customers around the world.
The second division makes finished products including work gloves, dress gloves, garments, bags, and ever-more different products as we further develop.
From a standing start we have now grown to 1,700 workers in Ethiopia. That's broadly split into 770 in the tannery and about 930 in the glove factory. Our vision for about five years from now would be that we expect to be employing about 5,000 or 6,000 employees in Ethiopia. We expect to expand our finished leather production and our finished products, but we will employ more people making added-value finished products.
How are you building the capacity of the local staff and linking their trainings to UK’s R&D hub?
There are one or two things in our philosophy that are slightly different to others. We have two trading divisions in the UK, in Somerset; making leather in the UK and premium finished products. The UK is where our intellectual hub resides, including our design, our development, our links to universities, and our research and leather development team. How we make a better performing product is fundamentally based in the UK. The clever part then is to link the intellectual hub of design and development in the UK with offshore manufacturing in Ethiopia. Where we can develop those skills locally, we do so. We are well placed to provide the necessary support needed from the UK.
Pittards is a very committed company, with a comprehensive CSR program for example collaborating with orphanages or giving opportunities to people that normally wouldn’t be able to be included in the productive sector. Please tell us more about your CSR strategy.
I think the key to our success is the people across our business, be that in the UK or be that here in Ethiopia. We have a core value, that the people that work for us are the lifeblood of our business.
Beyond that, being a 190-year-old company in the UK has taught us that you cannot have a successful history without being embedded in your local community. When we came to Ethiopia we replicated our values here. It is very important that we lay our foundation where we operate for the long term, because we might be here for 100 years, we don't know.
With that in mind, we have a limited budget, but what we try and do is work closely in our community at Ejersa, where the tannery is placed. For example, we try to build a classroom a year for the local school; we actually built three this year. It is quite humbling when you see the elders in the village come and bless the classrooms; we are clearly part of the local community. We will continue to do that as long as we are here. We do have some other contacts with organizations, for example Beyond the Orphanage/Bravehearts, which we support in a humble and small way, but it is very important. I think that any company that comes here should also embrace its community responsibility.
How do you personally feel being able to give back to the society, when you see the people coming and thanking you for your support?
I think it is very humbling when people say thank you. You don't do it for the thanks, you do it because it is the right thing to do. It is moving when you see how much people appreciate small things and are genuinely grateful. I actually think it is a duty of ours to support others wherever we practically can. Rather than a gesture, it is actually a duty. At the tannery we have a small clinic that was originally within the tannery when we took it over. We have added a little bit to it, and it is there for our employees, their families and any emergencies within the village. Although small, we are probably treating 30-50 people a day. Again, it might only be small things, but it makes a big difference in a rural community. At the glove factory we intend to extend and build a new canteen facility and, when we can, we will probably add a small clinic here as well.
Pittards complies with the ISO 14001:2004 international standard for environmental management. How important is environmental protection for Pittards?
If we first consider our primary raw materials, which are hides and skins from Ethiopia, we now take them from within Ethiopia and make them into leather. This leather is then converted into finished product at our second factory in Addis. These are then exported directly to the consumer markets in America, Europe and the Far East. This is quite a contrast from what happened previously; raw material moved from Africa and was sold partly processed to traders around the world, then sent to different tanneries that made them into leather. This leather would then be sent to another country for manufacture, and eventually sent to the end consumer market… Looking at the big picture from an environmental carbon footprint point of view, it doesn't make sense to do that. The more we can do in house and shorten that supply chain, the better and more responsible supply chain we will have.
The second aspect to consider is that if you are a company such as ours, which is 190 years old, historically we are dealing with branded customers and responsible consumers. We always act compliantly and responsibly when it comes to our supply chain – a behavior that is reinforced throughout our teams. We have lots of orders from customers abroad who sometimes have questions about child labor, employment law, legislation, safety, and environment. Ethiopia is actually very well placed in that regard. It has serious labor laws, which are strictly imposed. There are lots of other countries that are not as well developed in terms of protection for employees as Ethiopia.
You overlay that with a philosophy from a company like ours, where we absolutely believe in no discrimination and treating everybody with respect all the way through the system. If you look at our gender balance we probably have a 50/50 split across the whole of our company. We have an open door for disabled employment, which is just automatic for us, but is not necessarily true in other companies. That's not to say we are not continually improving; we are committed to adhering to all legislative guidelines.
The final aspect is environmental impact. An environmental commitment is never finished. It's a philosophy as much as a final detail because as fast as we do something better, we need to move on and continue the upward trend. We would like to operate as a zero-waste company, both in terms of manufacturing at our glove factory and at the tannery. Whilst that is almost impossible, we continue to make small decisions that take us further towards our end goal. What can we do with waste to turn it into something that is useful in another sector? That applies in all aspects of our business. Everything that we cut off we will try and make into something else.
Obviously the tannery is accredited with ISO 14001, as you mentioned. I think we have probably got the largest effluent treatment plant at our tannery in Ethiopia. Can we improve it? Absolutely – we are improving it every month, and we continue to do so.
You stated the pound’s recent fall against the dollar would help Pittards, as more than 70% of the company’s products are invoiced in dollars. Lower raw material prices are starting to boost margins. What do you expect from 2016?
The reality is that for anything that we manufacture in the UK, where we are selling in dollars and converting back to pounds, the current situation is to our advantage. Within Ethiopia it's not quite as simple as there is a relationship between birr and the dollar. Certainly raw material prices and heavy commodities are down, as following the global trend. The dollar is strong at the moment but there is a global uncertainty as to whether the world is on the brink of another recession or not. The jury is still out about whether that's the case. There are obviously clear advantages for any manufacturer when the currency is strong and raw material costs decrease, but it is clear that global demand is definitely soft across all markets. We are continually balancing those two factors and hope we can push the seesaw in our favor; we will have to see how 2016 works out.
Ethiopia and the UK have had long and fruitful relations. What is your assessment on the current diplomatic and commercial relations of both countries? What opportunities would you like to highlight to UK investors?
I think Britain has a special relationship with Ethiopia. It goes back quite a long way; it's not a recent thing. Companies have to work very hard over time for a relationship that goes back around 100 years. Certainly Britain is a major investor in Ethiopia, and it is fully committed to helping Ethiopia become the strong economic nation is has the potential to be.
Pittards as a company is well respected for its integrity in Ethiopia, given its long-standing partnership and investment history. It is important to stand by your word, even if it may be difficult. Whenever we have had contracts here we have stood by them. Ethiopians have honored that as well. You earn trust. I think as a British company and a British brand, we get a lot of respect in Ethiopia that is justified. We are well treated and are welcomed into the community of Ethiopia.
I would encourage British companies to explore the avenues that Ethiopia could offer them as a result of our experience here and we would be pleased to offer any advice or guidance that they may require. I would recommend that companies planning to embark on investing in Ethiopia need to be considering a medium to long-term plan. Ethiopia will not benefit from companies looking to exit the country quickly after arriving. If you are committed to developing a solid business for the long term, it's a very good place to be.